Battle for the bottom
Big guns want to serve the small guy
BY THE TIME South Africa’s big banks realised they were missing out on a feeding frenzy at the bottom end of the banking market, Capitec had 2m clients and was growing aggressively, courtesy of the active marketing of its offering as being the cheapest in the country. It now has 3m clients transacting, either through borrowing or depositing money.
After years of failing to either treat poorer South Africans or take Capitec seriously, the banking sector – hungry for growth – has woken up to the fact that there’s money to be made through pushing high volumes of low-value transactions through its infrastructure.
However, the big banks will be cautious about chasing market share for the sake of it. It learned an expensive lesson over the past decade as it underpriced credit and allowed intermediaries to drive a turf war in the mortgage sector, which has left a legacy of bad debts. It’s a case of once bitten, twice shy.
But the allure of a profitable new business line is proving too much to resist and now it’s sniffed a profit opportunity. However, the battle for the bottom of the banking market is starting to turn ugly. That’s illustrated by First National Bank, which is aggressively rolling out its Easy Plan offering and taking market leader Capitec to the Advertising Standards Authority (ASA) over its claims of being SA’s most cost-effective banking offering.
The ASA ruled that Capitec should drop its claim. FNB said it proved Capitec wasn’t the cheapest while the Stellenboschbased bank said it had been kyboshed on a technicality rather than on substantive proof that FNB charges less. FNB CEO Michael Jordaan has made no secret of the fact that the group has been studying the Capitec model for some time. Unlike African Bank, which purely extends loans, Capitec also takes deposits. That’s part of the magic: it raises longer term deposits more cheaply than it could through the wholesale markets by offering attractive rates and lends that money on at considerably higher rates over shorter time periods.
FNB has been the most active of SA’s Big Four banks in its pursuit of clients previously considered by the industry as “unbankable”. However, Absa is growing its presence in this market through Absa Transact, which is aimed at the same clientele. Standard Bank is also active in this sector; and Nedbank has also been driving a new message in an effort to capture more of the lower-end market.
The success of the bigger banks in this market will be determined by whether they’re able to price competitively for risk. Loans tend to be smaller and shorter dated than they’re used to. For example, FNB provides loans from R250 to as much as R60 000, while also offering commoditised funeral cover.
Capitec’s credit-scoring mechanisms and effective use of technology have also thus far stood it in good stead.
What the bigger banks have that Capitec does not is the potential to graduate the best of those clients over time to its higher margin up-market offerings. To use a cricket analogy: SA’s big banks appear content to play five-day test matches rather than trying to emulate the more garish T20 formula.
MICHAEL JORDAAN Studying the Capitec model